Design Professionals Ins. Co. v. Chicago Ins. Co.

• Decision Date: 21 July 2006
• Docket Number: No. 05-2326.,No. 05-2276.,No. 05-2275.,05-2275.,05-2276.,05-2326.
• Citation: 454 F.3d 906
• Parties: DESIGN PROFESSIONALS INSURANCE COMPANY, a California insurance company, Appellee/Cross-Appellant, v. CHICAGO INSURANCE COMPANY, an Illinois insurance company, Appellant/Cross-Appellee, ESI Group, Inc., an Arkansas corporation, Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 906

454 F.3d 906

DESIGN PROFESSIONALS INSURANCE COMPANY, a California insurance company, Appellee/Cross-Appellant, v. CHICAGO INSURANCE COMPANY, an Illinois insurance company, Appellant/Cross-Appellee ESI Group, Inc., an Arkansas corporation, Appellee/Cross-Appellant.

No. 05-2275.

No. 05-2276.

No. 05-2326.

United States Court of Appeals, Eighth Circuit.

Submitted: February 16, 2006.

Filed: July 21, 2006.

D. Keith Fortner, argued, Little Rock, AR, for appellant.

Steven T. Shults, argued, Little Rock, AR, for appellee Design Professionals.

Stephen Louis Gershner, argued, Little Rock, AR, for ESI Group.

Before WOLLMAN, ARNOLD, and GRUENDER, Circuit Judges.

ARNOLD, Circuit Judge.

The parties to this insurance action appeal various rulings by the district court. We affirm in part, reverse in part, and remand the case for further proceedings.

I.

Miller, England & Company (MEC) was an Arkansas accounting firm headed by Michael Miller. MEC carried what is called a claims-made professional liability insurance policy with the Chicago Insurance Company, a defendant in this action; such a policy provides coverage only for claims made against an insured during the policy period. MEC's agent for this policy was Rhodes & Associates; Chicago's agent was the Herbert H. Landy Insurance Agency. The one-year policy period ended on August 11, 1999. After the policy period ended, MEC had sixty days during which to report to Chicago any claims that were first made against MEC during the policy period. During the same sixty days, an endorsement to the policy gave MEC the right to buy what is called tail coverage, which would provide coverage for claims first made after the policy period expired that were based on conduct that had occurred prior to the policy's expiration date.

Burris, Adlong & Company (BAC), headed by Gary Burris and Rosemary Adlong, was another Arkansas accounting firm. BAC also carried claims-made liability insurance, which it purchased from plaintiff Design Professionals Insurance Company (DPIC). The policy period for BAC's insurance ended on September 1, 1999. According to the policy, firms that had been merged with or acquired by BAC were insured under the policy for up to thirty days following the effective date of the acquisition or merger. The policy did not define what constituted an acquisition or merger for the purpose of coverage.

After Ms. Adlong announced her intention to retire, Mr. Burris and the principals at MEC decided to combine the two accounting firms. Both firms sent notices of that decision to their clients, and on August 1, 1999, BAC closed its office and combined its operations with MEC, which changed its name to Burris, Miller & Company (BMC). BMC's principals abandoned the BAC corporate charter, and it was eventually revoked for failure to pay franchise taxes. At no time did MEC and BAC file articles of merger with the Arkansas Secretary of State.

With both firms now combined, BMC's principals chose DPIC as BMC's liability insurance provider. Accordingly, Rhodes sent Chicago's agent, Landy, a letter informing Chicago that MEC's claims-made policy would be allowed to expire; Landy, in turn, sent a letter to Rhodes confirming the expiration. In that letter, Landy mentioned that additional "extended reporting period options" were available. (The policy endorsement listed premiums for what it described as twelve-, thirty-six-, or sixty-month "extended reporting period[s].") In explaining those options, however, Landy's letter misstated what claims would come within the tail coverage. Although the endorsement to the policy stated that any tail coverage that MEC purchased would cover claims first made against it during the extended reporting period, the letter suggested that any "extended reporting period option" would cover only claims that were first made against MEC before the policy's August 11 expiration date. Thus the letter implied that any tail coverage would not cover claims first made after MEC's policy expired.

On August 19, eight days after MEC's policy expired, the president of ESI Group, Inc., telephoned Mr. Miller and made a claim against him, MEC, and an MEC employee, Stan Parks, for damages stemming from an audit that Mr. Parks had performed for ESI. Mr. Miller promptly notified Rhodes of the claim, who in turn informed Landy. Chicago wrote to Mr. Miller, telling him that because the claim had not been first made during the policy period, it was not covered by the automatic extended reporting coverage. In that letter, Chicago did not mention that MEC could still purchase tail coverage that would include the ESI claim.

While Mr. Miller notified Rhodes of the ESI claim, Mr. Burris contacted DPIC's agent to let him know about the claim. At first, DPIC refused to provide a defense. Once ESI filed suit in state court against MEC, Mr. Parks, and Mr. Miller (the MEC defendants), however, DPIC agreed to defend them under a reservation of rights, which preserves an insurer's right to deny that the policy covers a claim. On the eve of the ESI trial, the parties entered into a settlement agreement: DPIC paid $100,000 to ESI and agreed to pay an additional $600,000 if it was later determined that its policy with MEC covered ESI's claim, Mr. Parks agreed to a consent judgment against him for $1,000,000, and ESI agreed to look only to insurance coverage for payment on its claims. In a separate agreement, the MEC defendants assigned all of their rights against Chicago (MEC's original insurer) to DPIC.

While the state lawsuit was pending, DPIC filed this action in district court, naming Chicago and ESI as defendants. DPIC sought a declaration that its policy did not provide coverage for ESI's claim, as well as partial reimbursement from Chicago for payments that it (DPIC) had already made on that claim. ESI filed a cross-claim against Chicago to recover on the $1,000,000 consent judgment entered against Mr. Parks. The parties moved for summary judgment. The district court granted partial summary judgment to DPIC, declaring that its policy did not provide coverage for the ESI claim because BAC, the purchaser of the policy, had not merged with MEC under Arkansas law. The court granted summary judgment to Chicago on DPIC and ESI's estoppel claims. On breach of contract claims against Chicago filed by DPIC and ESI, the district court concluded that Chicago was required to provide MEC with certain information about tail coverage, and a jury found that Chicago had not done so. The district court entered a judgment against Chicago based on the jury verdict. Chicago appealed, and DPIC and ESI filed cross-appeals.

II.

A.

DPIC and ESI alleged that Chicago breached its contract with MEC by failing to disclose that any tail coverage that MEC purchased would have covered the ESI claim. They asserted that the duty to disclose that fact arose from Ark. Code Ann. § 23-79-306(3)(B), which requires that a notice of termination of insurance must inform an insured that an extended period endorsement is available for purchase, and they relied on "the general rule that a statute governing insurance coverage becomes part of a policy affected by it," First Sec. Bank of Searcy v. Doe, 297 Ark. 254, 257, 760 S.W.2d 863, 865 (1988). In denying summary judgment motions filed by DPIC and ESI, the district court agreed that § 23-79-306(3)(B) obligated Chicago to send a notice of termination explaining the availability and importance of tail coverage, but it determined that a material issue of fact remained as to whether Chicago satisfied that obligation by sending the Landy letter. That issue was submitted to a jury, which found in favor of DPIC and ESI. The district court denied Chicago's motion for judgment as a matter of law, and it entered a judgment for DPIC and ESI based on the jury verdict.

We review de novo the district court's interpretation of a specific provision of the Arkansas Code. See BancInsure, Inc. v. BNC Nat'l Bank, N.A., 263 F.3d 766, 770 (8th Cir.2001). Section 23-79-306(3)(B) states that "[a]ny notice of termination of a claims-made policy must include a disclosure advising the insured and his or her agent of the availability of and premium for an extended reporting period endorsement and the importance of purchasing the coverage." The issue here is whether Arkansas law requires an insurer to send a notice of termination when the insured simply allows the policy to expire. DPIC and ESI argue that a "termination" within the meaning of § 23-79-306(3)(B) occurs whenever a policy ends, regardless of whether it is cut short or merely expires of its own terms. Chicago disagrees, arguing that a termination occurs only when the insurer or the insured take some affirmative step to end an existing policy.

Where a term in a statute is clear and unambiguous, it will be given its ordinary meaning. Cash v. Arkansas Comm'n on Pollution Control & Ecology, 300 Ark. 317, 320, 778 S.W.2d 606, 607 (1989). A statutory term is ambiguous when it is capable of two or more constructions, or when it is so unclear that reasonable minds could disagree or be uncertain as to its meaning. R.K. Enter., L.L.C. v. Pro-Comp Mgmt., Inc., 356 Ark. 565, 572, 158 S.W.3d 685, 688 (2004). When an ambiguity exists, the court will interpret the provision in a way consistent with the legislature's intent. Central & Southern Cos. v. Weiss, 339 Ark. 76, 80, 3 S.W.3d 294, 297 (1999). That intent may be divined by looking "to the language of the statute, the subject matter, the object to be accomplished, the purpose to be served, the remedy provided, the legislative history, and other appropriate means that throw light on the subject." Saforo & Assocs., Inc. v. Porocel Corp., 337 Ark. 553, 565, 991 S.W.2d 117, 124 (Ark.1999).

The subtitle of the Arkansas Code dealing with insurance does not provide a definition for the word termination, nor is the term consistently employed throughout that subtitle. In some...